how your system handles price shocks, outliers, black swans?
Posted: Sun Aug 15, 2004 12:21 pm
I was reading Perry Kaufman's Smarter Trading and thinking about his chapters on price shocks.
A few weeks ago I was in Orange Juice when it dropped 5 cents. In about 5 minutes. It dropped 12 cents in two days. I was also in Live Cattle a month or so ago when I foolishly held onto a position over the weekend and there was a mad cow scare in the US.
So I've been involved in two price shocks albeit run-of-the-mill.
The theory is that price shocks are more common than people think. And that they are not accounted for in many systems. Systems do not handle them well, and people do not backtest for them adequately.
And then there are the black swans which are the mega price shocks such as October 1987 or summer/fall of 1998, where things happen that are not "supposed" to happen.
How do you handle these in your system, and what has happened to you in the past that has made you adjust your system from price shocks?
A few weeks ago I was in Orange Juice when it dropped 5 cents. In about 5 minutes. It dropped 12 cents in two days. I was also in Live Cattle a month or so ago when I foolishly held onto a position over the weekend and there was a mad cow scare in the US.
So I've been involved in two price shocks albeit run-of-the-mill.
The theory is that price shocks are more common than people think. And that they are not accounted for in many systems. Systems do not handle them well, and people do not backtest for them adequately.
And then there are the black swans which are the mega price shocks such as October 1987 or summer/fall of 1998, where things happen that are not "supposed" to happen.
How do you handle these in your system, and what has happened to you in the past that has made you adjust your system from price shocks?